Economic development and outlook in Japan
Article 3 minute read

Economic development and outlook in Japan

05 June 2018

Though many worry over the government’s deficits and deflation in recent decades, Japan’s economy seems to be progressing better than the world perceives.

Japan’s economy has slowly regained its spot as one of the world’s most attractive investment destinations.

“Since the late 1990s, the growth in Japan’s real GDP per head has outperformed every other major economy. And unlike other major economies, income inequality in Japan has not increased, remaining amongst the lowest in the developed world.” Dhaval Joshi of BCA Research stated in a Financial Times news report.

Here’s a breakdown of Japan’s economic development and outlook.

Japan's GDP continues its recovery trend

As of 31 March 2018, the country registered a drop of 0.2% in its 2018 first quarter GDP, marking the first drop in two years and three months after a record of eight straight quarters of GDP growth.

Though the negative growth rate was the first in two years and three months, economists overall believe the economic activity will likely continue its recovery; companies continue to increase capital expenditure for labour saving given the gradually decreasing workforce; exports keep driving the economy.

The Bank of Japan (BOJ) expects the country to continue its expansion in the fiscal year 2019 on a moderate level, due to a seasonal slowdown in business fixed investments and the scheduled consumption tax hike.

Resilient corporate profits and capital investments

Both corporate profits and capital investments have been growing at a strong pace with overseas market demand. A wave of labour saving and rationalisation have been driving capital investments. However, the current trade tensions between the US and China could bring Yen appreciation, which would affect Japanese exports, and the rate of growth in corporate profits may stumble as a result.

Confidence in small and medium-sized businesses has improved significantly. This is thanks to the past eight quarters of consecutive GDP growth that resulted from global demand for exports, pushing record corporate profits and rising capital investments.

According to the BOJ’s March Tankan (Short-Term Economic Survey), large manufacturers’ overall assessment of business conditions improved for the fifth straight quarter, hitting a high of +23. The confidence index among small and medium-sized businesses reached +20, the highest level recorded since August 1991.

Improving employment environment

Japan’s unemployment rate continues to stay in the range of 2% to 3%, while labour participation of women and senior citizens is increasing steadily. In fact, the country’s latest unemployment rate stands at 2.5% for April 2018.

“Job availability was also unchanged at 1.59, the Ministry of Health, Labor and Welfare said. The ratio means there were 159 job openings for every 100 workers,” according to Nikkei Asian Review’s news report.

As a whole, Japan’s economic growth will be supported by the increasing numbers in the labour force and healthy rise in wage levels.

Household spending in Japan remains strong

The Consumption Activity Index (CAI, travel balance adjusted) which is calculated by combining various sales and supply-side statistics, contracted by 0.4% in the first quarter of 2018. However, the index increased in 2017 compared with a year before due to the replacement demand for automobiles and household electrical appliances, improved sales at department stores and a recovery in demand from foreign visitors to Japan.

At the same time, services consumption maintained moderate increases reflecting a rise in communications charges as well as medical, health care and welfare fees.

Inflation rate close to 1%

The average Consumer Price Index (CPI) of Japan in April 2018 stood at 0.7% and this is a positive signal given the country has battled deflation for many years.

Though it is still a distance from achieving the central bank’s target of 2%, BOJ believes the target is within reach, backed by the improvement in the output gap and the rise in medium to long-term inflation expectations.

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Written by

Dr. Junichi Kato

Managing Director, TMF Japan

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